Diversity and Economic
Development:
Geography Matters
Nicholas Crafts
WEHC, Kyoto, August 7, 2015
Diversity
• It’s not a neoclassical world of β and σ
convergence
• TFP gaps are big and technology is not
universal
• Different locations
• Different trade specializations
• Different technologies
Key Questions
• Who wants to produce what, where and
why?
• What technology is invented and used by
whom?
• Why might globalization promote
divergence?
Research Avenues
• 2 promising recent developments:
New Economic Geography
Directed Technical Change
• Ideas have run ahead of empirics; we need to
put flesh on the bones
• A future challenge will be to connect the two
Changes in 19th-Century
Economic Geography
• Industrialization and de-industrialization in
globalizing world
• Concentration of world manufacturing
production and, even more so, exports
• Changes in location influenced by transport
costs in the First Unbundling (Baldwin,
2012)
Shares of World Industrial Production (%)
1750
1830
1880
1913
1953
2010
China
India
33
30
12
4
2
15
24
18
3
1
2
2
Western USA
Europe
23
0.1
34
2
61
15
57
32
26
45
24
25
Sources: Bairoch (1982) and UNIDO (2012)
Shares of World GDP (%)
China
1820
1870
1913
1950
1973
2010
2030
2050
33
17
9
5
5
16
28
29
India
16
12
8
4
3
6
11
16
Western
Europe
23
33
33
26
26
19
13
10
Sources: Maddison (2010) and OECD (2012)
USA
2
9
19
27
22
23
18
17
Historiography
• Lots of explanations for 19th century continental
divergence including:
Imperialist exploitation (Mandel, 1975)
Institutions (Acemoglu et al., 2002)
Dutch Disease (Williamson, 2011)
• Do NEG and DTC add anything?
New Economic Geography:
Key Ideas
• 2nd Nature Geography matters
• Agglomeration Benefits
• Market Potential
• Trade Costs
• Globalization may imply divergence
Globalization and the Inequality of
Nations (Krugman & Venables, 1995)
• Manufacturing goods are subject to increasing
returns and are used both as final and as
intermediate goods
• As trade costs fall, self-reinforcing advantage of
larger market leads to country-specific external
economies of scale and lower costs for
manufacturing in core relative to periphery
• Eventually, if trade costs fall enough and/or
wages in the core rise enough, manufacturing
returns to (parts of) the periphery
Location of Manufacturing
• The ‘manufacturing belt’ in the United States is
locked into place by market potential which
interacts with scale and linkage effects (Klein &
Crafts, 2012)
• Catalonia industrializes to a much greater
extent than the rest of Spain as a result of
favourable market size (Roses, 2003)
• Lancashire dominated the world cotton textile
industry based on second nature geography
(Crafts and Wolf, 2014)
Market Potential and GDP
100 Years Ago
• Similar impact on real GDP/person to late 20th
century with elasticity of about 0.3 (Liu & Meissner,
2015)
• Core Europe has much greater market
potential than peripheral Asia (and Southern
Europe) by the late 19th century
• Changes in transport networks and shifting
spatial distribution of GDP since 1820 ‘lock in’
Europe’s industrial-location advantage
Market Potential (London, 1800 = 100)
1800
1870
1910
SE England
77
757
3411
NW England
61
499
1862
Kwantung
126
319
1075
Madras
80
256
1296
Source: Caruana-Galizia et al. (2015)
Directed Technical Change
Acemoglu (1998) (2002)
• Endogenous-innovation model with bias in
technical change reflecting factor endowments
• Market-size and relative price effects: former
dominates in 20th century but latter in 19th
century?
• Innovative effort based on expected profitability;
innovations in ‘core’ inappropriate for ‘periphery’
and increase income gaps (Allen, 2012)
The British Industrial Revolution
(Allen, 2009)
• “The Industrial Revolution was invented in Britain
in the 18th century because it paid to invent it
there”
• The key is the number of potential adopters to
justify fixed costs of R & D
• Britain was uniquely well placed in terms of
relative factor prices (wage/energy price)
• Cotton textiles became a British exportable
(Broadberry & Gupta, 2009) and Lancashire dominated
world trade for 100 years
Silver Wages, 1650-1849 (grams/day)
Southern
England
Antwerp Strasbourg China
Yanszi
India
1650-99
5.6
7.1
3.1
1.4
1700-49
7.0
6.9
2.9
1.5
1750-99
8.3
6.9
3.3
1.7
1.2
1800-49
14.6
7.7
8.1
1.7
1.8
Sources: Allen (2001); Broadberry and Gupta (2006).
Real Price of Energy (grams of silver/mn. BTU)
1650-99
1700-49
1750-99
1800-49
Western UK Coal
0.58
0.63
0.65
0.50
Western UK Charcoal
1.80
2.49
2.97
2.67
Antwerp Coal
6.41
7.61
6.60
5.51
5.14
7.66
12.31
13.12
10.78
Canton
Puna
Source: Allen (2009)
Connecting NEG and DTC
• This is a future challenge – no book of
blueprints
• Clearly there are connections: geography
potentially affects market size and relative factor
prices and thus the direction of technical change
(cf. the Habakkuk controversy)
• Successful agglomerations (cf. Lancashire) and
better market access (Head & Mayer, 2006) raise
wages